The recent spike in interest rates may have made it harder for you to afford the home you want. For a $300k home, a 1% increase in the interest rate means a roughly $200 increase in the monthly mortgage payment, and that means you need a $400 raise to qualify for the same home before rates went up.
If you can’t convince your boss to boost your paycheck, I have another option: a Mortgage Credit Certificate. The certificate provides a tax credit equal to 20% of the interest you pay each month as part of your mortgage payment. And here’s the important part: we can treat that tax credit as additional income to help you qualify for more home.
A $300k 30-year mortgage with a 6% interest rate could generate a tax credit of almost $3600 in the first year. That boosts your qualifying income by almost $300 per month.
What do you do if you want to buy a home and don’t have money for a down payment? Bank of America just announced a new no down payment mortgage targeting minority communities, and that might work for you if you live in Dallas. Certain neighborhoods in Dallas are the only areas of Texas eligible for the program.
So, what if don’t live in Dallas or if your income is too high for this program? Here’s another option. The Texas State Affordable Housing Corp (TSAHC) offers down payment and closing cost assistance up to 5% of your loan, and it’s available throughout the state.
And unlike a lot of down payment assistance programs, the TSAHC program does NOT require that you be a first-time homebuyer to qualify. You do need a credit score of at least 620, and you must be able to qualify for a conventional mortgage.
The program does have income limits, but they’re surprisingly generous. In the Austin area, the income limit is almost $140k, and in some targeted areas, the limit is almost $155k. In Dallas, the limit is just over $120k and in Houston just over $110k.
Wednesday evening, the Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, announced a tax to be charged on every refinance loan it purchases beginning Sep 1st. The “tax” is a fee equal to 0.5% of the loan amount. So, a $300k loan will incur a $1500 fee.
Given that it generally takes a few weeks for Fannie and Freddie to purchase loans from lenders, this means that starting immediately, refinancing your mortgage just got more expensive.
FHFA calls the fee an “adverse market fee” due to the risk and economic uncertainty caused by the Wuhan virus. That explanation might be more believable had FHFA also applied the fee to purchase loans. Refinance loans are less risky than purchase loans because they usually reduce a homeowner’s housing payment.
Instead, it looks more like a money grab. It’s certain that FHFA knows that right now wholesale lenders have fat margins on refinance loans because mortgage rates have not kept pace with the rest of the bond market. Based on the way this fee was imposed, it seems FHFA thinks it needs a “piece of the action.”
Like most misguided government policies, this probably was the brainchild of some bureaucrats who are clueless how the mortgage marketplace really works. They probably thought consumers would be insulated from the fee, that they’d just be fleecing lenders. Instead, refinance rates Thursday morning were about a quarter point higher.
It’s really disappointing that in a time of national crisis, when refinancing to get a lower housing payment might help so many families survive, that these supercilious people thought the best course of action was yet another tax.
We hit record low mortgage rates a week ago on headlines about a possible second wave of the coronavirus. Rates had been trending higher this month after the amazingly strong May jobs report. That positive news was reinforced by private reports of increasing economic activity. The coronavirus news was a wet blanket that thrashed the stock market and caused flight to safety bond buying.
So, Treasury rates have returned to what I call their “covid range.” We saw little movement this week as investors seem to be waiting for more definitive information about the reopening of the economy. That’s been good news for mortgage rates because, as we’ve discussed before, mortgage rates have been suffering from a “risk premium” effect. That premium is slowly evaporating, and as it does, mortgage rates fall just a bit more.
If you haven’t refinanced yet or you’re thinking about buying a home, you may wonder if this means mortgage rates are destined to hit new record lows in the weeks ahead. Unfortunately, my crystal ball is clouded, so I can’t give you a definite answer. But we can discuss the factors that could lead to new record lows.
Simply put, it’s covid headlines. Last week’s stock market swoon was driven by fears that the covid damage wasn’t done. Headlines about spiking virus cases will stoke that fear. For now, the fear seems to be balanced against the recent positive economic data, leaving rates stuck in their current range. Should the data begin to deteriorate, or should the headlines become more dire, rates could fall further.
But keep in mind that every new record low is a little harder to achieve. For bonds, the rate is inversely proportional to the bond’s price. Thus, when we have record low rates, we have record high prices. Each time we hit a record high price, more bond investors are likely to view it as “the one,” sell their bonds and take their profits. If there are more sellers than buyers, rates rise.
Spring typically is the peak season for home buying, but this year’s Coronavirus scare has given us a particularly unpredictable market. As lockdown orders hit the economy, sellers took their homes off the market – either out of concern over people entering their homes or concern they wouldn’t be able to sell for their desired price. Buyers had their share of concerns, too, as millions lost jobs, were furloughed, or took pay cuts.
Despite all that, many economists still suggest this summer will be a good time to buy a home. Granted, some of these economists work in the real estate industry, and saying that is self-serving. But their reasoning contains some logic, so if you’re in the market for a new home, you may want to consider these points.
First, this virus-induced recession is entirely different than the last one. The real estate industry drove the Great Recession a decade ago, and home prices declined dramatically in many markets. In this recession, it looks like real estate will remain relatively unscathed, which is what has happened in recent recessions other than the Great Recession.
Second, as lockdown orders are lifted, it’s likely real estate markets will see a flurry of activity due to pent up demand, and we are starting to hear this from local realtors. It sounds likely you’re going to face the same competitive market we had last year. Homes that are priced correctly will sell quickly.
Third, interest rates are at record lows, and I don’t expect they can get much lower. If you wait and rates rise, you may not be able to afford as much home.
If you need to buy a new home, keep in mind that sellers are just starting to come back into the market. Home choice may remain a little lean for a couple more weeks, but analysts are predicting a surge of listings this summer. Get a good real estate agent to help you identify homes as soon as they’re available and to help you keep from paying too much.
A question I keep getting asked – are mortgage rates going to drop any further? I wish I had a crystal ball so I could give everyone a definitive answer. Instead, I’ve tried to educate the questioners about the finer points of the mortgage bond market, but I find they usually fall asleep before I get to the tenth slide.
So, after trying to answer this question so many times, I think I have winnowed out the minutiae and will try to defend a simple answer. I think there’s about a 75% chance mortgage rates will go lower, and here’s why I believe that.
Mortgage rates tend to follow the 10-year Treasury bond. I say “tend to” because the correlation isn’t perfect, and current times are a good example. If mortgage rates had followed 10-year Treasuries perfectly to their current very low levels, 30-year mortgage rates would be around 2.5%. Instead, they’re hanging in the mid-3% range.
That begs the question why. We’ve discussed some of the reasons previously, but it seems the most tractable one is the CARES Act. The Act gave homeowners with a mortgage the right to request a forbearance from mortgage payments for up to 12 months with seemingly no penalty to the homeowner. Unfortunately, loan servicers, the companies to which you send your mortgage payment, still have to pay the investors who bought those mortgages, as well as pay property taxes and insurance premiums for homeowners who escrow. The Mortgage Bankers Association estimates servicers may need to come up with $100 billion (that’s billion with a B) to cover the forborne payments, and the Act didn’t provide servicers with any assistance. As a result, the bond market is requiring higher mortgage rates to account for this risk.
A number of Congressmen and Senators as well as trade associations have asked the Executive Branch to do what Congress failed to do – provide a borrowing program for mortgage servicers. Rumor has it that the Treasury Dept has heard them, and something is in the works.
For mortgage rates, the questions then become:
whether markets think the program will be effective, thus relaxing what is essentially a risk premium currently built into mortgage rates; and
how quickly will it happen?
The risk for those waiting for lower rates is that the economy ramps up again, allowing rates to rise naturally, before markets eliminate the risk premium, allowing rates to fall. But if your mortgage needs are more urgent, or you’re more risk averse, the current 3.5% mortgage rate really is pretty sweet.
The realities of social distancing and shelter-in-place orders are impacting the real estate industry. For those who are trying to buy or refinance a home, those realities could impact your ability to close your loan. The Federal Housing Finance Agency (FHFA) has taken notice and in response has instructed Fannie Mae and Freddie Mac to ease some of its loan guidelines in two areas.
With respect to appraisals, the FHFA recognized that a standard appraisal in which the appraiser visits and inspects the home is not consistent with virus containment measures. Instead, Fannie and Freddie have agreed to accept appraisal alternatives with some conditions. For most purchase transactions, if the lender uses what’s called a desktop appraisal – for which the appraiser relies on public records, multiple listing service information, and other third-party data sources to identify the property characteristics – and the estimated value is within limits established by Fannie and Freddie, the lender won’t be held accountable for the value, which means the lender should be willing to close your loan.
With respect to employment, the FHFA recognized that many employers are either shut down or their employees are working remotely. The traditional verification of employment the lender performs before closing may not be possible. The new guidance allows lenders to accept an email from the borrower’s employer or evidence the employee is still on payroll – such as a recent pay stub or bank statement showing direct deposit of a payroll check.
While these accommodations are great, it’s up to individual lenders to agree to use them. As lenders still bear some responsibility for loans that default, and given the current economic situation, you may find that your lender isn’t willing to take the risk.
Quite simply, mortgage rates are all over the place right now, and the market is a mess. Despite conspiracy theories you may be reading on social media, the government isn’t keeping rates artificially high to help Wall Street make a fat profit. In fact, it’s because of government involvement that rates are as low as they are.
Let’s take a short look back. It was only about 20 days ago that mortgage rates hit all time lows. Those lows lasted all of a couple hours one morning – and then rates started moving quickly higher. I discussed in my last blog some of the reasons that happened. In the simplest sense, it was due to basic economics. There were a LOT of mortgage bonds to sell due to the record low rates, and there were very few buyers of those bonds due to market turmoil surrounding the coronavirus. In order to clear the market, mortgage rates shot up over 5% in short order.
Since then, rates have been extremely volatile, falling back below 4% some days, then jumping back above 5%. But I said the government has been keeping rates low. How does that jive with the volatility?
Well, this weekend, the Federal Reserve basically wrote a blank check – indicating it would purchase an almost unlimited amount of mortgage bonds to restore liquidity to the market. That means markets can trade on the certainty that there will be a buyer for mortgage bonds. Now, that doesn’t guarantee low rates because the Fed is not setting the rates of the mortgages it buys. Instead, it allows the market to set rates knowing there will be a buyer.
The desired result – which I think we’re beginning to see – is more restrained volatility. Thirty-year rates were back below 4% the last couple days for most lenders, and despite continued volatility, have remained there.
Over the weekend, the Federal Reserve cut the federal funds rate to zero, and it seems the whole world is asking today, “Where can I get that free money?” And, unfortunately, you can’t. The reasons are a little complex, but let’s see if we can break it down a little.
First, you have to realize that the federal funds rate, and in fact all the rates the Fed directly sets, are very short-term rates. Mortgage rates are long-term rates. They respond to different factors, and often move higher when the Fed rates are moving lower.
So, mortgage rates have been on a wild ride the last couple weeks with rates falling to record lows, then bouncing 25% higher in just one week. The reason they fell so quickly is the same as the reason the Fed acted this weekend: the pandemic is slowing our economy. But it looks like the virus is going to be with us for a while, so why didn’t rates remain at record lows? Let’s analyze the causes and predict what will happen over the coming weeks.
Mortgage rates are a reflection of the price investors are willing to pay for mortgage-backed securities – basically, your mortgage bundled with a bunch of others as an investment. That price is influenced by a number of factors. We discuss some of those factors regularly, such as expectations for economic growth and expectations of inflation. It’s economic growth expectations that caused rates to plummet a couple weeks ago.
But we had other negative factors come into play last week.
– One of those factors we call runoff. As we’ve discussed before, investors buy mortgage bonds expecting to earn interest over a number of years. When mortgages pay off early, such as through refinance, investors actually may lose money. In response, investors lower the price they’re willing to pay for mortgage securities, which results in higher rates.
– A second factor is basic economics: supply and demand. The drop in rates generated an enormous number of mortgage applications. We didn’t have enough investors to absorb all that supply. On top of that, investors didn’t seem to be the mood to buy much of anything last week as prices dropped in most markets.
– Finally, lenders’ systems were overwhelmed with the volume of new applications, and many of them raised their rates as a means of throttling that volume.
So, what’s next? While the federal funds rate announcement isn’t going to lead to lower rates, one of the Fed’s other actions may. The Fed is stepping into the market to buy a small amount of mortgage-backed securities. It appears this is returning liquidity to the market as rates have dropped a little today.
It probably will take a few weeks to dissipate the other negative factors, but I suspect the positive factors, slowing economy and negligible inflation, will still be in place. And once that happens, we could see record low mortgage rates again.
Fair Issac Corporation is poised to release a new FICO credit scoring model, and for about 40 million American, the changes could cost them money. The new model, FICO 10, will score consumers more strictly for late payments and rising debt levels.
Fair Issac says the new model will help lenders reduce defaults by up to 10%, but for consumers who see their scores drop, it could mean they receive higher interest rates if they qualify at all.
The company says it has further integrated trended data into the model, meaning the models consider not only a consumer’s current account status, but also the account’s payment history for the last 24 months. This should help consumers who are paying more than the minimum monthly payment to reduce their debt. On the negative side, the new model will treat personal loans more harshly, which could hurt consumers who use those loans to consolidate credit card debt.
If you’re planning to buy a home this spring, take a deep breath. It’s highly unlikely you’ll encounter the model while applying for a mortgage. Most of the mortgage industry is stuck in a time capsule – using FICO 4, a model released in 2004. Changing the model requires approval from the Federal Housing Finance Agency, which moves at glacial speed.
While that may sound like good news, keep in mind that FICO 4 has its own issues. FICO 4 scores, what I call “mortgage scores,” tend to be lower than just about any scores available to consumers. Fair Issac has improved its models over the years in ways that also help consumers, and none of those changes are available for mortgage applicants.